The leverage effect describes the phenomenon that the use of debt capital can increase the return on equity. This occurs when the company's total return on capital is higher than the interest rate that has to be paid on the borrowed capital. In this case, the profit generated by the borrowed capital is not fully utilised by the interest costs, so that part of it increases the profit on equity. However, the leverage effect also harbours risks: If the total return on capital falls below the interest rate of the debt capital, the effect is reversed and the return on equity falls. Special valuation requirements can be met by add-ons such as the Versino Financial Suite that enable advanced financial analyses.
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